Nintendo looks to power-up Mario after not-so-super Wii U

TOKYO | By Sophie Knight and Reiji Murai

A shopper rides an escalator past Nintendo advertisements at an electronics retail store in Tokyo January 20, 2014.

Reuters/Yuya Shino

TOKYO Nintendo Co Ltd, facing a third year of losses, is getting lots of unsolicited advice on how to squeeze more out of its Mario franchise and revive its fortunes after admitting that its Wii U game console has been a flop.

The company has given few clues on its new management strategy, due to be announced on Thursday. One thing, however, is certain - it will have to burn through a lot of its cash pile in the years it takes to try again with the Wii U's successor.

The Nintendo that emerges could well be a more efficient company - better at marketing its beloved characters, but still wedded to its basic strategy of making hardware as the vehicle for software developed in-house.

Most analysts do not expect a bolder change of direction, such as making its back catalogue available via an online subscription service or allowing its games to be played on smartphones - despite some saying they are the future of gaming.

The Kyoto-based company has been slow to move online, falling behind Microsoft Corp (MSFT.O) and Sony Corp, which will launch a cloud-based streaming service this summer enabling users to play the same game across numerous platforms.

Taking Mario to the cloud would be a big step for conservative Nintendo.

"Online is big and Nintendo is notorious for not having a great online system," said Jean Snow, a Tokyo-based gaming expert.

The company faces no imminent existential danger. With 850 billion yen in cash and its own shares at the end of last September it can survive a few years of losses.

That cash pile was amassed from past hits such as the first Wii - evidence, say some, that a company with its history of booms and busts has the ability to turn things around once more.

"Nintendo is a special thing, because of its history, so many gamers have a soft spot for Nintendo... they just shot themselves in the foot with this piece of hardware, the Wii U," said Snow. "But I totally think they can get out."

WII U FAILURE

The failure of the Wii U - whose annual sales forecast was slashed by 70 percent earlier this month - leaves Nintendo as the loser of the pack now led by Sony and Microsoft.

Analysts say the Wii U foundered because too few games were released for the console, with development issues leading to a delay of more than six months between the games released at the launch in November 2012 and the next batch of titles.

"There's no software that is made especially for the Wii U. If there were fun games that you couldn't play on anything else then that would be something to talk about," said Eiji Maeda, an analyst at SMBC Nikko.

It was the sports and fitness games introduced with Nintendo's previous console, the Wii, that made it a runaway hit as their use of the console's unique motion sensor controllers drew in families and video games newbies.

But those casual gamers have been unconvinced of the need to upgrade to a console whose name and concept seems so close to its predecessor, while core gamers hanker for the more adult games, higher processing power and connectivity offered by Sony's Playstation 4 and Microsoft's Xbox One.

Although Nintendo CEO Satoru Iwata said that sales of the Wii U would pick up as more titles are released, there are few cases of a console becoming a hit after a slow start. Third party developers are also less likely to want to make games for a failing console.

Nintendo has survived misses amid its hits before. It weathered the blow to the games industry from the collapse of rival Atari, scoring a hit with its Nintendo Entertainment System, and later won a battle for dominance against Sega.

Nintendo's Gamecube console, released in 2001, stumbled against Sony's PlayStation 2 and Microsoft's Xbox. The Wii was initially derided for lacking the high-definition graphics of its rivals' next-generation consoles. It went on to outsell the Xbox 360, with more than 100 million sold by September 2013.

NEXT LEVEL

Nintendo budgeted a record 70 billion yen for research and development this year, as increasingly sophisticated graphics and functions has pushed the average cost of making a game to around 2-3 billion yen.

But with the company falling short of a 100 billion yen operating profit target set last year, Thursday's announcement is likely to focus on cost cuts. Nintendo will report its third-quarter results on Wednesday.

"The increase in the cost of game development is one of the reasons why Nintendo hasn't put out (enough new) software," said Hideki Yasuda, an analyst at Ace Securities.

Nintendo has already moved to reduce costs by merging its portable and home game console departments last year.

Some investors doubt the move will be drastic enough, with some clamouring for Nintendo to license its games out to other companies and to make a mobile version for Apple's (AAPL.O) iOS and Google Inc's (GOOG.O) Android smartphone platforms.

But the robust sales of the Playstation 4 and Xbox One suggests the threat of smartphones to home game consoles has been overplayed, while Nintendo has long resisted going mobile, saying it would hurt the inherent value of its characters.

Instead, Nintendo could better exploit that value by expanding its franchises for characters such as Mario and Zelda as it did with Pokemon, which was spun into a successful cartoon series, movie and toys and is now owned by an affiliate.

"They could diversify their revenue streams... rather than licensing Mario to another game company it would be better to make a movie or a TV series," said Yasuda of Ace Securities. "Bandai Namco has found great success doing that with Gundam and Kamen Rider."